Remittance basis: exempt property: taking proceeds offshore or investing them (ITA07/s809Z9)
In most cases it will be obvious when property has been taken offshore. Money or other property will be treated as having been taken offshore where;
- it is not able to be used or enjoyed in the UK by or for the benefit of a relevant person, or
- to be used or enjoyed in any other way that would count as remitting income or gains to the UK.
Disposal proceeds are invested if a relevant person uses them to make a qualifying investment under the terms of the business investment relief legislation (refer to RDRM34330)
Proceeds in the form of money may be temporarily placed into an account in the UK before being taken offshore or invested. When the disposal proceeds are subsequently taken offshore or invested, the money must come from that same bank account. (ITA07/s809Z9(3))
There may be rare occasions when proceeds are received in the form of property rather than money. When this happens, proceeds will be treated as having been taken offshore or invested if:
- the property is taken out of the UK or invested in a qualifying investment, or
- money or property of an equivalent value is taken out of the UK or invested in a qualifying investment.
The second bullet point covers situations where, for example, immovable property such as shares or land and buildings are received as disposal proceeds. If those assets are UK based it may not be possible for an individual to take them offshore or invest them. The legislation allows for something else to be taken offshore or invested in place of those assets. (ITA07/s809Z9(4))
Where money or property of an equivalent value is taken offshore or invested, the money or property taken offshore or invested cannot be;
- exempt property under ITA07/s809X
- sale proceeds from the disposal of any exempt property, or
- the disposal proceeds from an investment qualifying for business investment relief (ITA07/s809Z9(7))
The money or property of an equivalent value that is taken offshore or invested will be treated as deriving from the thing required to be taken offshore or invested and as having the same composition of income, gains and capital as that thing. (ITA07/s809Z9(8))
The equivalent value means the market value of the property received as sale proceeds at the date of the sale (ITA07/s809Z9(5)).
Disposal proceeds are subject to the normal remittance basis rules once they are taken offshore or invested. Subsequent actions may result in the foreign income and gains contained in the disposal proceeds being treated as a remittance.
A relevant person may take part of the disposal proceeds offshore and invest the remaining part. Provided the full amount of the disposal proceeds are taken offshore or invested (or a combination of the two), the appropriate mitigation step will have been carried out. (ITA07/s809Z9(9) and (10))
If a relevant person invests disposal proceeds in a target company, they must make a claim to business investment relief (refer to RDRM34380). If no claim is made the relevant part of the original foreign income or gains that the exempt property derived from is treated as having been remitted to the UK at the end of the relevant grace period. (ITA07/s809VJ)
Salvo a remittance basis user sells exempt property in the UK on 12 February 2014 for £750,000. Within 45 days Salvo carries out the following with the sales proceeds;
he invests £250,000 in a qualifying company and makes a valid claim to business investment relief
he purchases an oil painting for £180,000 which he hangs in his Milan property
the balance of £320,000 is transferred to his Jersey bank account.
Salvo has met all of the conditions in section 809YA so any gain on the sale is treated as a foreign chargeable gain (ITA07/s809YD). The exempt property which Salvo purchased using his foreign income originally cost £375,000. This means that of each of the three amounts above will contain proportional amounts of the foreign income originally used to purchase the property and the foreign gain on its sale i.e.;
- The qualifying investment derives from £125,000 of Salvo’s foreign income and £125,000 foreign gain
- The oil painting is derived from £90,000 of Salvo’s foreign income and £90,000 foreign gain
- The Jersey bank account contains £160,000 of Salvo’s foreign income and £160,000 foreign gain
Sale proceeds will be subject to the normal remittance basis rules once they are taken offshore. If sale proceeds are brought back to the UK, either in the form in which they were received or as property derived from foreign income and gains, the money or property will be treated as a taxable remittance (subject to any exemptions or reliefs that may be claimed) (ITA07/s809YC(3))
The investment does not have to be made by the relevant person who made the initial disposal. It is sufficient that any relevant person makes a qualifying investment.
Consuela, a UK resident remittance basis taxpayer, owns a piece of antique furniture she purchased in Madrid using £200,000 of her foreign chargeable gains that arose in 2010-11.
In 2015-16 Consuela brings the furniture to the UK to sell to an antique dealer for £400,000. Within 45 days of receiving the sales proceeds, Consuela transfers £200,000 to her sole account in Madrid and gives the remaining £200,000 to her husband Alejandro, who loans the money to his brother Carlos’ company. The company is an eligible trading company and Consuela makes a valid claim to business investment relief on her 2015-16 tax return.
The £400,000 proceeds of sale have all been taken offshore or invested. The conditions in s809YA have been met and the sale is not a remittance by Consuela of her foreign chargeable gains. Unless Consuela elects not to apply s809YD by giving relevant notice to HMRC, the gain on the sale is a deemed foreign chargeable gain.
As all of the transactions are offshore transfers for remittance basis purposes, the £200,000 in Consuela’s Madrid bank account and the £200,000 investment in Carlos’ company are both deemed to contain £100,000 of Consuela’s foreign chargeable gains for 2010-11 and £100,000 of her foreign chargeable gains for 2015-16.